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MarketWatch: Shell signs deal with Tatneft on Russian tar sands project

By Benoit Faucon
Last Update: 8:19 AM ET Sep 27, 2007

LONDON (MarketWatch) — Royal Dutch Shell PLC (RDSB.LN) Thursday signed a deal with OAO Tatneft, Russia’s sixth-largest oil producer by volume, to develop a major tar sands project in Tatarstan, its home region, and paved the way for other potential projects.

The deal follows an alliance signed by Shell in July with Russian state-controlled oil company OAO Rosneft for oil and gas production and refining in Russia and abroad.

Under the agreement setting the principles of a strategic partnership, the two companies will devise a program for heavy oil development in Tatarstan, Shell said.

The deal “opens the door to other potential joint activities, including the acquisition of new licenses for hydrocarbon exploration in Tatarstan and elsewhere in Russia,” the Anglo-Dutch oil major added.

As part of the agreement, Tatneft and Shell will consider establishing a joint venture or using other forms of cooperation.

The announcement comes as Shell is trying to expand its business in Russia after losing control of its flagship Sakhalin II oil and gas project to Russian state-owned gas giant OAO Gazprom.

The move underscores how, despite Russia’s increased assertiveness over its natural resources, the country’s companies are still seeking participation of foreign investors, including to tap their know-how and technology.

Russian companies don’t have any substantial experience in developing tar sands. Shell, by contrast, is active in developing natural bitumen deposits in Alberta, Canada.

Shafagat Takhautdinov, the general director of Tatar-government-controlled Tatneft said “cooperation with Shell, which is known for its advanced technologies for development of heavy oil worldwide, will combine experience accumulated by both companies.”

In another example of Russian and foreign cooperation, Gazprom decided to give France’s Total SA a 25% stake in the company operating the Barents Sea’s Shtokman project. Gazprom will retain ownership and marketing rights to all of the field’s hydrocarbons, estimated at over 3.5 trillion cubic meters of natural gas and associated condensate.

Tatneft expects to produce 1.5 million to 2 million metric tons of oil a year from the tar sands project by 2020 for which it has signed the alliance with Shell.

Shell said the two companies will “conduct a feasibility study and assess technologies for extraction and processing (upgrading) of heavy oil, which is part of existing exploration and production licenses held by Tatneft.”

According to Russian media reports, Tatneft had a shortlist of eight candidates that included Shell, Exxon Mobil Corp. (XOM), Chevron Corp. (CVX), ConocoPhillips (COP) and Repsol YPF SA (REP).

A Tatneft spokesman said neither the form of cooperation, nor the target production price are known.

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